Quick Summary
Many 401(k) menus grow over time as funds are added and rarely removed, which leads to overlap and confusion. A tiered structure, built around a default option, a core set of low-cost building blocks, and in some plans a brokerage window, gives employees clear choices. Every fund on the menu has to be selected prudently and monitored, so a shorter list can also mean a more manageable fiduciary job. The Department of Labor proposed a rule in March 2026 that would set out a process-based framework for selecting plan investments.
Most 401(k) investment menus were not designed so much as accumulated. A fund was added when the plan started. Another was added because an employee asked for it. A third came along with a recordkeeper change. Years later, the plan offers 25 or 30 options, several of which do nearly the same thing.
A longer list can feel generous, but it is not always helpful. For employees, it can make a simple decision harder. For the business owner, every fund on the list is another investment that has to be prudently selected and monitored.
Why more is not always better
Participants faced with a long list of funds often respond in predictable ways. Some put off the decision. Some spread their money evenly across every option, whether or not that produces a sensible mix. Others pick whatever is at the top of the page. A widely cited 2004 study of 401(k) plans found that participation rates tended to decline as the number of funds offered increased.
Long menus also create overlap. Three large-company growth funds, two intermediate bond funds, and a handful of similar balanced funds do not give employees more diversification. They give them more ways to hold the same thing, often at different costs.
Finally, every option is a fiduciary responsibility. ERISA requires plan fiduciaries to monitor each investment on the menu, not just the popular ones. A lineup that is easier to understand is usually easier to oversee and document as well.
A tiered approach
Many plans organize their menus in tiers, each with a distinct purpose:
- Tier 1: A default or all-in-one option. For most plans, this is a target date series that also serves as the qualified default investment alternative. It is designed for employees who want a single, professionally managed choice.
- Tier 2: Core building blocks. A short list of broadly diversified, low-cost funds covering U.S. stocks, international stocks, bonds, and a capital preservation option such as stable value or a money market fund. These let employees who want to build their own mix do so without wading through duplicates.
- Tier 3: Selected specialty or actively managed options. Some committees add a limited number of funds where they believe active management or a specific asset class adds value for participants. Others skip this tier entirely.
- Tier 4: An optional self-directed brokerage window. A window gives experienced investors access to a wider range of investments. It is not a substitute for a well-built core menu, and fiduciaries still need to monitor its costs and how it is used.
There is no required number of funds. The goal is a menu where each option has a clear job and no two options do the same job.
Cost and share class still matter
Streamlining is also a chance to revisit costs. The same fund is often available in several share classes with different expense ratios, and plans sometimes hold a higher-cost class than they qualify for. Revenue sharing arrangements built into fund expenses can also make it hard to see what the plan is really paying.
Lowest cost is not the only test. A fiduciary may reasonably choose a fund with higher fees if it provides value that justifies the difference. But that judgment should be deliberate and written down, not inherited from a lineup no one has looked at in years.
The DOL's proposed selection framework
On March 31, 2026, the Department of Labor proposed a rule titled "Fiduciary Duties in Selecting Designated Investment Alternatives." It followed an August 2025 executive order focused on giving 401(k) investors access to alternative assets, but the proposal itself is asset-neutral and applies to any investment on a plan menu.
The proposal describes a process-based safe harbor built around six considerations: risk-adjusted performance, fees, liquidity, valuation, benchmarking, and complexity. It also states that fiduciaries are not required to pick the lowest-cost option or the one with the highest expected return.
The rule is a proposal, and its final form may change. Even so, the factors line up closely with what a careful investment review already looks like. A plan that documents how each fund was chosen and how it is monitored is well positioned whatever the final rule says.
Streamlining without upsetting employees
Removing funds requires care. Plans generally map money from a removed fund into a similar fund or into the QDIA. ERISA section 404(c)(4) provides fiduciary relief for qualifying fund mapping when participants receive advance notice and an opportunity to choose for themselves. Your recordkeeper can help with timelines and required notices, and any trading blackout may require its own notice.
Explaining the reason for the change helps. Employees generally respond well to "we simplified the menu and lowered costs" when the message is clear and the transition is easy to follow.
Questions to ask about your menu
- How many funds does the plan offer, and does each one have a distinct role?
- Are there funds that overlap in style or asset class?
- Is each fund in the lowest-cost share class available to the plan?
- When was the lineup last reviewed against the investment policy statement?
- If the plan offers a brokerage window, who monitors it?
Thinking about simplifying your lineup? Brian Williams, CPFA®, of Northshire Consulting LLC | Registered Investment Advisory Firm works with business owners to review plan menus and investment processes. Call 203-401-6062, email bwilliams@northshireconsulting.com, or visit northshireconsulting.com to schedule a plan review.
Frequently asked questions
Do we have to offer a self-directed brokerage window?
No. A brokerage window is optional. Some plans find it useful for a small group of experienced investors, while others leave it out to keep the plan simpler.
If we remove a fund and its replacement performs worse, are we liable?
Fiduciaries are judged on the prudence of their process, not on hindsight. A documented review, a reasoned choice of replacement, and proper participant notice are the core of a defensible decision.
How often should we review the investment menu?
Many plans monitor investments quarterly and do a deeper review at least once a year, guided by their investment policy statement. The key is a consistent schedule and written records of what was reviewed and decided.
This material is for educational purposes only and is not individualized investment, tax, or legal advice. Advisory services are offered through Northshire Consulting LLC | Registered Investment Advisory Firm.